Is London heading for another property price bubble as soon as 2017?

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London faces being in the grip of a housing bubble by 2017 – with the cost of renting and buying in the capital becoming completely detached from earnings, new research reveals.

The city’s 11 per cent surge in property prices has not been matched by a rise in average wages, leaving Londoners increasingly priced out of the property market.

Figures released by academics at Lancaster University also show London is out of sync with the rest of the country, as housing campaigners have long since warned.

Professor Ivan Paya, who led the study, said it served as a “warning” for policy-makers that the current price increase rate in the capital’s housing market is not sustainable and could “burst”.

He went on to say that even more new homes were needed to counter the effect, as the demand for housing continues to exceed supply.

He said: “We looked at how the values change over time, then we apply statistical tests to see what places are facing an exuberant phase – this is one of the causes of a bubble phase.

“This means prices are growing very fast. This is generally a sign that prices are too high.”

He continued: “We have created the study as a warning system in case policy-makers want to use it. When prices are in an exhuberant phase there is a risk of they will crash.

“And there is a risk for people with mortgages because you can be at risk of negative equity.”

Rhys Moore, head of campaigns at the National Housing Federation, said developers were only building a third of the housing needed to supply demand in London.

He said: “It’s no secret that there is a mounting housing crisis in London which is more acute than anywhere else in the country. We simply cannot let this escalate further to the point where the bubble bursts.

“Ever inflating house prices and skyrocketing rents are driving Londoners into smaller, lower quality housing. We’re only building one third of the 56,000 new homes the capital needs every year to meet demand.

“Housing associations in London are key to helping to solve the housing crisis in the capital, with an ambition to build thousands more new homes for rent, sale and shared ownership. They are committed to working in partnership with the Mayor to make this a reality for the future.”